Market angst about France’s upcoming presidential election infects whole of EU

France’s presidential election is fomenting deep anxiety in markets. Currency options prices show investors have rarely been so worried about how a single event might weaken the glue that holds the EU together. Blame far- right candidate Marine Le Pen, whose promise to reshape ties with the EU if she wins would be an existential test for the bloc.

Polls suggest Le Pen will lose a second- round run- off on May 7, regardless of whether her opponent is independent centrist Emmanuel Macron or scandalhit Francois Fillon, the center- right candidate. Yet investors have been caught off- guard by too many surprises during the French campaign – and by votes in other countries – to take a Le Pen defeat for granted.

The depth of their unease is revealed by the implied volatility of currency options. The difference between onemonth contracts, which expire before France’s second- round vote, and twomonth options, which cover the entire election period, provides a snapshot of investor anxiety. For euro- dollar options, this gap hit 2.7 percentage points on March 14 – the widest range since 2002 – before narrowing slightly after the Dutch anti- EU politician Geert Wilders failed to make a breakthrough in elec- tions on Wednesday.

Nor are investors focusing solely on what Le Pen might mean for current members of the single currency. Comparable moves in options prices in central and eastern European markets point to a deeper concern about the fate of the bigger European integration project.

The gap between the implied volatility of one- month and two- month options is larger for the currencies of EU countries whose economies have converged more closely with the euro zone, such as the Czech Republic. The contrast is even more vivid versus non- EU emerging market currencies, such as the South African rand.

Markets could quickly swing back if Le Pen loses. As last year’s referendum in the UK showed, investors have no better idea than the man in the street about how elections will pan out. That’s probably why they are so worried right now.